GfK. Growth from Knowledge

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1 GfK. Growth from Knowledge Interest only mortgages Consumer research consumer strategies for repaying the loan at the end of the mortgage term Ludgate House, 245 Blackfriars Road, London SE1 9UL

2 CONTENTS 1 Glossary Background to the study EXECUTIVE SUMMARY Methodology Repayment strategies Repaying the capital shortfall expectations Shortfall characteristics Other financial commitments Mortgage decision making A note on reading charts in this report Sample statistics and confidence intervals Chart formats Research findings 1: profile of Interest only mortgage holding and purchase Distribution of mortgages: time scales and values Comparing endowment mortgages and NEIO mortgages Selecting the mortgage type Purchasing the mortgage Discussing the repayment strategy Changing the type of mortgage Providers Mortgage choice and arrangement among NEIO mortgage holders Research findings 2 ability to repay the mortgage Reported ability to repay the mortgage Repaying the capital modelling an estimate of shortfalls Size of potential shortfall estimated by the holder Shortfall size comparing holder-estimated and modelled levels Repayment strategies Overall presence of a repayment strategy Repayment Strategies Strategy specifics Contact from lenders Attitudes of IOM holders Appendix 1 Cognitive testing of the questionnaire Background Overview Individual sections: understanding how you intend to pay off your mortgage Basic information about the mortgage Individual sections: additional borrowing... 75

3 9.6 Individual sections: overview and checking Conclusion Appendix 2 - Methodology data collection Defining the universe of respondents Sample sources Questionnaire Sample size Appendix 3 - Notes on research findings Sample statistics and confidence intervals Respondent reported vs. modelled data Appendix 4 - Screening for the main survey Appendix 5 - Basis for balance sheet calculation and shortfall modelling Modelling of shortfall Growth rate assumptions Appendix 6 Imputing missing data and missing property values Imputing missing data Imputing missing property values Appendix 8 The Financial Research Survey Methodology and Sampling Random location design for face-to-face sample Online sample design Post survey weighting Appendix: Further charts Appendix 7 Questionnaire... 1 FIGURES Figure 3.1: Proportion and number of the IOM population with and without a repayment strategy... 4 Figure 3.2: Repayment strategies in use... 5 Figure 3.3: Proportion and number of IOM population expecting and modelled to have a shortfall when the repayment is due (central estimate)... 7 Figure 5.1: Distribution of year mortgage taken out and year mortgage due to be paid back Figure 5.2: Distribution of values of mortgage, initial value and current estimate value of the home Figure 5.3: Current age and maturity date Figure 5.4 Proportion of endowment / NEIO mortgages held by when mortgage taken out (excluding further advances) Figure 5.5: Proportion of endowment mortgages/ NEIO mortgages held by maturity date Figure 5.6: LTV ratios for endowment mortgage and NEIO mortgage holders Figure 5.7: Current LTV and mortgage maturity date Figure 5.8: Type of mortgage, split by region Figure 5.9 Proportion of IOM holders with homeowner loans / other debt, split by LTV bands... 20

4 Figure 5.10 Proportion of IOM holders with homeowner loans / other debt, split by FSS segment Figure 5.11: Proportion of IOM purchasers who were aware (at the point of purchase) that they needed a separate repayment plan by bands of year mortgage arranged Figure 5.12: Proportion of IOM purchasers who were aware (at the point of purchase) that they needed a separate repayment plan in bands of LTV Figure 6.1: Proportion of IOM population who say they expect a shortfall by the time repayment is due Figure 6.2: Proportion and number of IOM population expecting and modelled to have a shortfall when the repayment is due (central estimate) Figure 6.3: Proportion of IOM population modelled to have a shortfall by maturity date Figure 6.4: Proportion predicted to have a shortfall, split by age Figure 6.5: IOM holder-estimated shortfall among those who think they may have a shortfall by repayment vehicle Figure 6.6: IOM holder-estimated shortfall among those who think they may have a shortfall by maturity date(s) Figure 6.7: Shortfall expected among those who think they will or may have a shortfall compared to predicted shortfall from the modelled balance sheet Figure 6.8: Comparing reported shortfall and modelled shortfall, for all and for those with a maturity date by Figure 6.9: Comparing reported shortfall and modelled shortfall by maturity date Figure 6.10: Comparing reported shortfall and modelled shortfall by mortgage type 40 Figure 6.11: Comparing reported shortfall and modelled shortfall by age of mortgage holder Figure 6.12: Comparing reported shortfall and modelled shortfall by region Figure 6.13: Comparing reported shortfall and modelled shortfall by household income Figure 6.14: Comparing reported shortfall and modelled shortfall by household income, for those with a maturity date up to Figure 6.15: Comparing reported shortfall and modelled shortfall by LTV Figure 6.16: Comparing reported shortfall and modelled shortfall by segmented household affluence Figure 6.17: Mean shortfall in '000 split by shortfall index Figure 6.18: Shortfall index groups split by LTV Figure 6.19: Shortfall index groups split by region Figure 6.20: Shortfall index groups split by segmented household affluence Figure 7.1: Proportion and number of the IOM population with and without a repayment strategy Figure 7.2: Proportion of the IOM population with and without a repayment strategy split by maturity date(s) Figure 7.3: Proportion of the IOM population with and without a repayment strategy split by LTV bands Figure 7.4: Type of repayment strategy in place, overall and split by endowment mortgage/ NEIO mortgage Figure 7.5: Repayment strategies used by IOM holders Figure 7.6 Type of repayment strategy overall and split by maturity date(s) Figure 7.7: Number of repayment strategies cited by IOM holders Figure 7.8: Repayment strategies chosen by those with few strategies (one to three) vs. four or more Figure 7.9: Percentage expecting a shortfall by number of repayment strategies being employed Figure 7.10: Percentage saying they have been contacted by their lender... 68

5 Figure 16.1: Options considered for those selling their home... 1 Figure 16.2: Downsizing... 2 Figure 16.3: Types of repament strategy by LTV bands... 3 Figure 16.4: Types of repayment strategy by FSS segments... 4 Figure 16.5: Expectations of shortfall by FSS... 5 Figure 16.6: Awarness of the need for a separate repayment plan... 6 TABLES Table 4.1: Confidence intervals Table 5.1: Mean current mortgage balance, reduced by current size of repayments by risk horizon (modelled data) Table 5.2: House price when purchased and current house price Table 5.3: Q8 - What made you decide to take the type of mortgage you did? Table 5.4: Q9 - In which of the following ways did you organise your mortgage? Table 5.5: Existence of repayment strategy among those aware and not aware of the need for a separate repayment plan when they took out the mortgage. 24 Table 5.6: Q10 - Who is your current mortgage with? Table 6.1: If you do have a shortfall, how would you deal with that? Table 6.2: Affordability of current mortgage split by prediction of excess or shortfall 48 Table 7.1: Other strategies chosen by endowment mortgage holders Table 7.2: Q20 - What made you decide to change how you were going to repay your mortgage? Table 7.3: Other repayment strategies being used by those who intend to downsize, comparing those who will not be able to do so with those who will Table 8.1: Which of the following best describes your attitude to borrowing and debt, including your mortgage? Table 9.1: Repayment strategies covered in each cognitive testing interview Table 9.2: Number of interviews for each repayment strategy Table 10.1 Sample profile Table 11.1: Comparison of pessimistic, central and optimistic estimates of proportion with shortfall and level of shortfall Table 12.1: Summary of screening outcomes Table 13.1: Summary of balance sheet calculations Table 13.2: Rates used in calculating the value of customer assets and property Table 13.3: Variables included in the balance sheet calculations Table 13.4: Balance sheet formulae Table 13.5: Formulae for calculating projections Table 14.1: Total and missing answers for each question Table 14.2: Variables used for imputing missing data Table 14.3: Banding for demographic covariates Table 14.4: Stated value with Experian property values used for substitution... 97

6 1 GLOSSARY To clarify terms used in this report: Interest only mortgage (IOM) any mortgage where a separate repayment mechanism is required by the borrower. Endowment mortgage a mortgage backed by an endowment policy, either, alone or with another interest-only repayment type product. Non-endowment interest-only (mortgage) (NEIO) all IOMs other than endowment mortgages. Financial Research Survey (FRS) a proprietary survey of the GB marketplace run by GfK NOP. Provided a source of contacts and background information for this project. Financial Strategy Segments (FSS) is Experian s consumer classification focused on understanding the financial behaviour of the UK population. Maturity date(s) the year that the IOM is due to be repaid. Loan to value (LTV) - the ratio of the size of mortgage to the current value of the property. The higher the LTV, the larger the mortgage as a proportion of the value of the property. Modelled data / balance sheet data a balance sheet was produced for each person which projects the elements of their repayment strategy through to their maturity date, using a set of assumptions provided by the FSA to model pessimistic, central and optimistic forecasts 1. Shortfall: a shortfall refers to whether the chosen repayment strategy will meet the full mortgage balance. Shortfall is reported from two sources: first, IOM holders were asked whether they thought they would be able to meet the full mortgage balance, second, those with a modelled balance of less than zero at maturity date are defined as having a shortfall. In both cases, the IOM holder may be able to meet the shortfall from other resources, but these have not been identified as part of the repayment strategies and so are discounted from this analysis. 1 (See appendix 3) GfK Financial 1

7 2 BACKGROUND TO THE STUDY The fundamental objective of this research can be stated as to size and profile UK owner-occupier interest-only mortgage consumers in terms of their ability to repay the capital at the end of the mortgage term. More specifically, the research was carried out to provide robust estimates of: the proportions and numbers of IOM holders with and without a repayment vehicle or strategy in place; the types of repayment vehicles and/or strategies in place for the repayment of the loan on maturity; the proportion and number of IOM holders facing a shortfall between the loan and the repayment vehicle values; and the level (value) of the shortfall between the loan and the repayment vehicle. GfK Financial 2

8 3 EXECUTIVE SUMMARY 3.1 Methodology The findings are based on a survey of 1,103 holders of IOMs using a combination of telephone and online interviews conducted in November IOM holders were asked in detail about their current mortgages, how and when they chose the mortgage, their repayment plans and their expectations for repaying the mortgage. The figures shown describe the UK market and are based upon a sample which is representative of the UK across age range and region. However, the spread of maturity dates and loans to value is not necessarily representative of the UK market as a whole. In addition to reporting on the information provided directly by IOM holders, a balance sheet was calculated for each survey participant, based on current mortgage and asset values and predicted mortgage and asset values at the date when the mortgage is due to be repaid (see appendices 3 and 5). This provides two estimates of ability to pay off the mortgage at the end of the term, that of the IOM holder themselves and that based on the modelled balance sheet. The modelling focuses on the position for maturities due in the next 10 years (to 2022) where we believe the assumptions used to be fair. Given the long-term nature of mortgages, the estimates are also extended on the same basis to 2041 illustrating possible longer term forecasts, but these should be treated with caution. 3.2 Repayment strategies 90% of IOM holders say they have a strategy or strategies in place to repay the capital sum owing on their mortgage at the end of the term. A small proportion (10%) say they have no strategy in place to repay their mortgage. GfK Financial 3

9 Figure 3.1: Proportion and number of the IOM population with and without a repayment strategy Less than 2.5% of the population say that they do not have a strategy in place to repay the mortgage and were unaware at mortgage inception that they needed such a strategy. Most IOM holders (72%) have one or two types of repayment strategy in place with a small proportion (16%) relying on a wider range (four or more). The most common repayment strategies are around savings and investments. The most used repayment strategy is an endowment policy, cited by 32%. Just over a quarter intend to sell their home (26% say their plan is to downsize or to sell their home and not buy another). Eighteen percent intend to make overpayments or use disposable income. Just under a fifth (18%) intend to switch away from their IOM, either by switching to repayment or by making another change, with 14% intending to change to a repayment mortgage at some time in the future when funds permit. A small minority (5%) said they would not be able to pay back the mortgage. As many mortgages due to be repaid in the short term are endowment (policy) backed, those due to repay their mortgage in the near future are more reliant on savings (including endowment policies). However, not all of those GfK Financial 4

10 who stated they had an endowment mortgage identified an endowment policy as one of their main repayment strategies and endowment mortgage holders are likely to have other strategies, particularly other savings, in place. Selling assets, including property, increases in importance for mortgages reaching maturity in the longer term. Strategies in use by less than 10% are: selling property other than the home, selling a business or other assets, and inheritance. Figure 3.2: Repayment strategies in use 2 Most IOM holders say they check that their mortgage repayment plans are on track (70% doing so at least once a year). However, 14% of all IOM holders (19% of NEIO mortgage holders) say they never check. Just over a quarter (27%) of IOM holders had been contacted by their mortgage provider in the last year to ask about their capital repayment plans. Contact is more common where the mortgage due date is closer. This contact does seem to have some effect on IOM holders: just over a quarter go on to take some action as a result, although only a small percentage (8%) of those contacted go on to change their strategy. 2 See footnote 9 (section 7.3.8) regarding those intending to sell their property GfK Financial 5

11 3.3 Repaying the capital shortfall expectations Most (75%) IOM holders say they are very or fairly confident that they are on track to repay their mortgage at the end of its term. However, a fifth of IOM holders are not confident that they will be able to repay. Those closest to their mortgage maturity date are most confident they are on track. A fifth (22%) say that they are expecting to have a shortfall when they need to repay their mortgage and a further 15% say they might have a shortfall. Of the 37% who therefore think they may have a shortfall, nearly a quarter (23%) do not know how much this will be. The average shortfall expected is 22,100, but there is a wide range: 33% think it will be less than 10,000, but 15% expect it to be more than 50,000. The balance sheet modelled data shows both more IOM holders having a shortfall, with 48% having a shortfall, and a much higher average shortfall of 71,850. However, given that the model assumes no change in either consumer behaviour or the wider economy, longer term estimates are naturally less accurate. If we restrict the analysis to those who have a mortgage due for repayment up to and including 2022, we expect 49% to have a shortfall, but the average shortfall drops to 56,200. GfK Financial 6

12 Figure 3.3: Proportion and number of IOM population expecting and modelled to have a shortfall when the repayment is due (central estimate) As might be expected, consumers uncertainty about the level of possible shortfalls increases the longer away the maturity date falls; just under a fifth (18%) of those with a maturity date up to 2016 do not know the level of shortfall they can expect, but this rises to 32% of those with a maturity date of 2026 or after. Among those who could estimate their likely shortfall, the level of shortfall increases over time. Of those expecting to repay by 2016, more expect to have a shortfall (32%) but the level of shortfall expected is lower, with 47% of those expecting a shortfall saying it will be less than 10,000. Only 55% of those with a maturity date between now and 2022, and who are modelled to have a shortfall, say that they expect to have one. 3.4 Shortfall characteristics Those IOM holders who expect to have a shortfall were asked how they would deal with this. The most common answer, given by one in five (21%) is to use savings. This is much more common among those who are due to pay off their mortgage up to 2016 (31%). In contrast, downsizing or selling the property, while chosen by a similar percentage overall (19%) is planned by only 6% of those with a mortgage ending soon, rising to 39% of those with a GfK Financial 7

13 term ending in 2026 to Fifteen per cent say they will re-mortgage and this rises to a quarter (25%) of those aged 55+ at the time of interview. Similarly, where IOM holders say they expect a shortfall, their plans for dealing with this tend to differ depending on whether they say they have an endowment mortgage (which may or may not still have an underlying endowment policy sitting behind it) or a NEIO mortgage. Those with an endowment mortgage are more likely to say they will use savings or disposable income (27% and 20% of endowment mortgage holders respectively). Those with a NEIO mortgage are more likely to say they will downsize (30% of NEIO holders). There is no clear relationship between household income and predictions of a mortgage shortfall. While the lowest income households are expected to have smaller shortfalls, there is no difference between predictions for medium or high income households. A substantial minority (17%) of householders are estimated to have a shortfall more than their annual household income. Younger IOM holders are more likely to have modelled shortfalls. 3.5 Other financial commitments In addition to their mortgage, 9% of IOM holders also have other borrowing secured on their home with the majority of these (89%) due to be paid off at the same time or before the mortgage. A sizeable minority (40%) also have other borrowing (credit card outstanding balance, hire purchase, personal loan etc.). Although this might be characterised as short term borrowing, those holding this debt are more likely to report themselves as potentially having a shortfall when their mortgage is due. In addition, those with a higher LTV are also more likely to have homeowner loans or other borrowing. A minority (15%) of IOM holders have switched to this type of mortgage from repayment mortgages. Those who have made this switch are most likely to have done so for lower monthly payments. 3.6 Mortgage decision making Mortgages tended to be arranged through three channels: banks or building societies, independent mortgage brokers and independent financial advisors. There has been an increase in usage of independent mortgage brokers over time. GfK Financial 8

14 Most IOM holders (90%) discussed their intended repayment strategy with a professional (bank, building society, solicitor, independent broker or independent financial advisor). While most IOM holders currently have a repayment strategy, 13% state that they were not aware, when they originally took out the mortgage, that they needed a separate repayment plan. Those who have taken out mortgages most recently (2008 to 2012) are more likely to say they were aware of the need for a plan. Reasons given for choice of mortgage are different for endowment mortgages and other IOMs. Endowment mortgages were chosen more because of advice (40%) and because they were a popular option at the time (34%). NEIO mortgages were chosen more because of lower monthly repayments (39%) and because it was the only mortgage the holder could afford (22%). GfK Financial 9

15 4 A NOTE ON READING CHARTS IN THIS REPORT 4.1 Sample statistics and confidence intervals As with any sample survey, the results presented here must be read in the light of the limitation of sample statistics. All findings have an associated confidence interval which is a range (+/-) around each finding that indicates the upper and lower bounds within which we must assume that the answer for the total population lies. The table below shows the confidence interval (+/-) for a range of sample sizes and answers. So, if we say that 50% of 1,000 IOM holders interviewed employ a certain repayment strategy, then with a confidence interval of +/-3% we can be confident that between 47% and 53% of all IOM holders employ that strategy. Table 4.1: Confidence intervals Sample size Answer given % % / 75% % / 90% Small base sizes are noted throughout the report. Throughout this report a number of charting formats have been used, which are intended to provide salient information in a clear and concise manner. It is hoped that these are self-explanatory, but as a clarification, the below explains a common format. GfK Financial 10

16 4.2 Chart formats Figure example: Proportion and total number IOM population with and without a repayment strategy in place by maturity date Axis for bar chart Absolute number of people in UK population (eg: with a strategy in place) % giving this response Absolute number of people in UK population (eg: with no strategy in place) Axis for lines Base All INDICATES LOW BASE SIZE (not needed on this chart) Absolute number of respondents In some cases the number of people within a particular subgroup who were asked each question may be low, and in those instances the results should be treated with caution. For the charts, wherever the base size is less than 100, this has been indicated with a red bar. Where a subgroup has a base of less than 30, data should be treated with extreme caution. In these instances the relevant subgroups with very low bases have been excluded from the charts in this report. GfK Financial 11

17 5 RESEARCH FINDINGS 1: PROFILE OF INTEREST ONLY MORTGAGE HOLDING AND PURCHASE Very few IOM holders have more than one type of IOM. While there are still a substantial number of IOM holders using an endowment policy, more than half (62%) hold a NEIO mortgage. There has been a strong tendency away from endowment policies over time, so that endowment mortgages tend to have a lower current balance ( 55,000 compared to 121,000 for NEIO mortgages), consistent with the increase in house prices over time. As a result of this change over time, the majority of mortgages due to be repaid over the next five years are endowment mortgages, with the proportion of NEIO mortgages increasing with time. A minority of IOM holders switch to this type of mortgage from repayment mortgages (15%). Those who make this switch are more likely to do so do for lower monthly payments, with a small number citing a lower income. Current LTVs are higher for those mortgages maturing well into the future than in the short term. In addition to their mortgage, 9% of IOM holders also have other borrowing secured on the property. The mean size of these loans is 13,023. The majority of these (89%) are due to be paid off at the same time or before the mortgage. A sizeable minority (40%) also have other borrowing (credit card outstanding balance, hire purchase, personal loan etc.). Although this might be characterised as short term borrowing, those holding this debt are more likely to report themselves as potentially having a shortfall when their mortgage is due. Those with a higher LTV are also more likely to have homeowner or other loans. 5.1 Distribution of mortgages: time scales and values The chart below shows the percentile distribution of when mortgages in the sample were taken out and due to be paid off. At the extremes, 5% of mortgages were taken out before 1986 and 5% since 2010, while 5% are due to be paid back in 2013 and 5% are due to be paid back after A quarter of the mortgages in the sample are due to be paid off by 2016 and 50% by GfK Financial 12

18 Figure 5.1: Distribution of year mortgage taken out and year mortgage due to be paid back There is a wide distribution of values of mortgages and property. The lowest 5% of mortgages have a value of 5,000 or less with the top 5% being over 270,000. Mortgage holders estimates of the current value of their homes show a strong growth in house prices, with the top 10% of houses being valued at 450,000 or over. Figure 5.2: Distribution of values of mortgage, initial value and current estimate value of the home GfK Financial 13

19 Age of mortgage holder Age of mortgage holder is inextricably linked with maturity date; the chart below shows that nearly half of those with a mortgage maturing up to 2016 are 55 or over, with only 2% aged 18 to 34, while half of those with a mortgage maturing after 2033 are aged now. This link should be borne in mind throughout the report older IOM holders will more strongly represented in any findings about mortgages with a near maturity date and younger IOM holders among those with a maturity date further in the future. Figure 5.3: Current age and maturity date GfK Financial 14

20 5.2 Comparing endowment mortgages and NEIO mortgages The majority of IOM holders have a NEIO mortgage (62%), with 41% holding an endowment mortgage and 3% an ISA mortgage. As can be seen, these add to over 100%, due to some holding combinations of mortgage types (with 4% holding both endowment and NEIO elements to their mortgage). Where NEIO mortgages are held, 5% of respondents state that this is a pension mortgage, with 56% stating some other form of interest only mortgage and 40% unsure as to the type of interest only mortgage they hold. Figure 5.4 Proportion of endowment / NEIO mortgages held by when mortgage taken out (excluding further advances) *Based on question S3 and Q1 3. As can be seen in in Figure 5.4 there has been a strong trend away from endowment policies over time, and whilst these make up a majority of older IOMs, the majority of mortgages held now are NEIO mortgages (62%). Whilst Figure 5.4 shows that the proportion of total IOMs that are endowment mortgages has fallen over time, with only 11% of IOMs in being endowment mortgage, the figure for still represented 21% of new IOMs taken out. 3 IOM holders could have more than one type of repayment vehicle, that is, they could have both an endowment policy and non-endowment vehicle to repay the mortgage.. GfK Financial 15

21 Figure 5.5: Proportion of endowment mortgages/ NEIO mortgages held by maturity date *Based on question S3 and Q1 Endowment mortgages tend to have lower average current balances than NEIO ones (at 55,000, compared to an average of 121,000 for NEIO). This higher balance reflects the fact that the property price tended to be higher for NEIO purchases than endowment mortgages probably due to the fact that endowment mortgages dominated pre-2001 property purchases. GfK Financial 16

22 Loan to Value As shown in Figure 5.6 below, and linked to the above, endowment mortgage holders tend to have lower LTV ratios than NEIO mortgage holders. Figure 5.6: LTV ratios for endowment mortgage and NEIO mortgage holders Figure 5.7 below shows that current LTVs are higher for those mortgages maturing well into the future than in the short term. Figure 5.7: Current LTV and mortgage maturity date GfK Financial 17

23 Regional variations As shown in Figure 5.8 below, regionally there is some variation in type of mortgage holding (although base sizes are small, so this should be regarded with caution). The areas with the most IOMs are in London and the South East. Note, Northern Ireland is not shown because of a very low base size. Figure 5.8: Type of mortgage, split by region House value and mortgage balance Respondents were asked for their current mortgage balance, and whilst only 2% refused to provide this information, a further 12% did not know. In order to allow analysis for the whole dataset, where respondents were unsure of their mortgage balance, this was imputed (see14.1) GfK Financial 18

24 Taking this calculation into account, the average amount currently owed on an IOM (including any further advances), net of any repayments / overpayments and assuming continuation of current payments at the same level is 73,000 (modelled). As would perhaps be expected, the further away from repayment (maturity date) an IOM is, the higher the current amount owed. Table 5.1: Mean current mortgage balance, reduced by current size of repayments by risk horizon (modelled data) Risk Horizon Current balance average '000s Unweighted base size Repayment due in Repayment due in Repayment due in Repayment due in 2033 and after *Based on Q2 and Q The table below shows average house value when purchased and estimated house price now. This shows the effect of house price inflation, with those with a near maturity date having seen large price increases compared to those who have a maturity date further away. Table 5.2: House price when purchased and current house price Risk Horizon House value when purchased House value now Base (all answering) Repayment due in Repayment due in Repayment due in Repayment due in 2033 and after All *Based on Q3, Q4, and Q5. In addition to the IOM, 9% of holders also have other homeowner loans secured on the property, with these additional loans more common amongst those expecting a GfK Financial 19

25 shortfall. The mean size of these additional loans is 13,024 4 with most (60%) due to be paid by Homeowner loans and other credit Apart from property-linked loans, a sizable minority (40%, rising to 55% of those aged 18-34) of IOM holders currently have some other form of borrowing (such as personal loans, outstanding balance on credit card, hire purchase agreements etc.) These additional borrowings do seem to increase the level of concern that IOM holders have, with those holding them being more likely to expect a shortfall and be less confident in being able to pay off their mortgage. However, where we have estimated a level of debt likely to be in place at the end of the mortgage term, this is based on the mortgage sum plus any homeowner loans, as unsecured loans are likely to be short term and so not still in place at the end of the mortgage term. Where IOM holders have a higher LTV ratio there are also higher levels of holdings of homeowner loans and other credit (see Figure 5.9 below). Figure 5.9 Proportion of IOM holders with homeowner loans / other debt, split by LTV bands *Based on Q100 and Q104 As would perhaps be expected, the incidence of additional debt is more prevalent in the Family Interest and Stretched Reserves FSS segments, and less so in the more affluent groups. The full breakdown by FSS segment can be seen in Figure 4 NB: base 92, so treat with caution. GfK Financial 20

26 5.10 below; be aware, however, that bases are low for most segments, so this should be regarded with caution. Figure 5.10 Proportion of IOM holders with homeowner loans / other debt, split by FSS segment Based on Q100 and Q Selecting the mortgage type The most cited reason for selecting an IOM was lower monthly payments (32%, being especially true for NEIO mortgage customers at 39% vs. 22% for endowment mortgage customers). Lower monthly payments seemed to be relatively less important when mortgages were taken out longer ago (for pre-1991 purchases this was cited by 20%), with these older mortgages (tending to be endowment mortgages) more taken as they were a very popular option at the time / best option at the time (33%). The desire for lower payments was closely followed by advice from a financial advisor or mortgage broker (29% - rising to 40% for endowment mortgage customers). (It should be noted that this advice does not necessarily reflect their actual purchase channel, rather the key influencers for their choice of product). GfK Financial 21

27 The main reasons for deciding to take the specific mortgage product were as shown in Table 5.3. Table 5.3: Q8 - What made you decide to take the type of mortgage you did? Total Endowment NEIO mortgage mortgage % % % Lower monthly payments Advice from a financial adviser or mortgage broker Very popular option at the time / best option at the time Only type of mortgage we could afford More flexible Better value in the long run Only type of mortgage we were offered / could get Already had a repayment plan / strategy in place from a previous mortgage (all mentioned by 5% and over) Base: All respondents Purchasing the mortgage A substantial minority of IOM holders (37% of all and 49% of endowment mortgage holders) organised the mortgage through a bank or building society, 30% through an independent mortgage broker and 28% via an Independent Financial Advisor (IFA). There has been an increase in usage of independent mortgage brokers over time. Thirty-seven percent of IOM purchasers organised their mortgage through a bank or building society in-branch, with 30% through an independent mortgage broker and 28% via an Independent Financial Advisor (IFA). Endowment mortgages were more commonly sold in a bank / building society branch (49% vs. 29% of NEIO mortgages) with brokers and advisors being the more common route for NEIO mortgages (of NEIO mortgages, 36% were arranged via an independent mortgage broker, and 31% an independent financial advisor, compared to corresponding figures of 21% and 24% for endowment mortgages). GfK Financial 22

28 Table 5.4: Q9 - In which of the following ways did you organise your mortgage? Total Endowment NEIO mortgage mortgage % % % Through a bank or building society in branch Through an independent mortgage broker Through an independent financial advisor Through a solicitor Through a bank or building society online Through a bank or building society over the telephone Base: All respondents Reflecting the increased availability of direct channels, over time there has been a movement towards online and telephone as the way to organise the mortgage (10% of IOMs taken out in were online, and 11% by phone) with a corresponding move away from organising the mortgage via the branch. The use of independent mortgage brokers increased from 20% of those who took out their mortgage pre 2000 to a high of 42% in , since when there has been a very slight decline, with 39% using independent mortgage brokers in Discussing the repayment strategy Most IOM holders do discuss their repayment strategy with a professional (bank, building society, solicitor, independent broker or independent financial advisor). However, 13% say they were not aware that they needed a separate repayment plan to repay the capital separately to the interest payments. The more recent purchasers of IOMs are more likely to be aware of the need for a repayment strategy at point of purchase. Ten percent of IOM holders did not discuss their repayment strategy with a professional (bank, building society, solicitor, independent broker or independent financial advisor at point of purchase, with a handful of purchasers discussing with an estate agent or family / friends). The general trend closely mirrors the way that the mortgage was organised (that is, with branch the most common channel, especially for older mortgages and endowment mortgages). Whilst most purchasers do discuss GfK Financial 23

29 their strategy, those purchasing an endowment mortgage are slightly more likely to have done so (93%) compared to NEIO purchasers (89%). For the whole IOM population It is not clear, however, how well purchasers understood the nature of the discussions, at the time they took out their mortgage, regarding repayment strategy, as a significant 13% 5 responded no when asked When you took out the mortgage, did you know that you needed a repayment plan that would repay the capital and that this was separate to the interest payments? For those IOM holders with /without a repayment plan in place As we will see in section 7.1, 1 in 10 IOM holders do not have a repayment strategy in place. A minority (24%) of these also say that they did not know, at point of purchase, that they needed a separate repayment plan. However, this equates to just less than 2.5% of all IOM holders. Table 5.5: Existence of repayment strategy among those aware and not aware of the need for a separate repayment plan when they took out the mortgage Aware of the need for a separate repayment plan Plan in place No plan in place Yes 81% 72% No 12% 24% Don t know 7% 4% Base The most recent purchasers of IOMs are the most likely to have been aware at the point of purchase of the need for a repayment strategy. As can be seen in Figure 5.11 below, the level of awareness was lowest in 2000 to Although this period did see a high volume of NEIO mortgages purchased, there is no evidence that NEIO mortgage holders are less aware of the need for a separate repayment strategy than are endowment mortgage holders. There is also no difference by age or by when the mortgage is due to be paid off. 5 A further 6% responded don t know (or were unsure whether they knew or not) GfK Financial 24

30 Figure 5.11: Proportion of IOM purchasers who were aware (at the point of purchase) that they needed a separate repayment plan by bands of year mortgage arranged *Based on Q12. Those on lower incomes are less likely to have been aware of the need for a separate repayment strategy,16 % 6 of those with a household income up to 11,499 were not aware compared to 8% 7 for those with a household income of 75,000 and higher. There is no link between household income and when the mortgage was taken out, so this difference cannot be explained by different levels of recall of the mortgage arrangement process. 6 A further 17% don t know (or were unsure whether they knew or not) 7 A further 4% don t know (or were unsure whether they knew or not) GfK Financial 25

31 Figure 5.12, below, shows that there is no link between LTV and reported awareness of the need to take out a separate repayment vehicle until LTV reaches 80% plus, when we do see an increase. Figure 5.12: Proportion of IOM purchasers who were aware (at the point of purchase) that they needed a separate repayment plan in bands of LTV 5.6 Changing the type of mortgage The majority (85%) of those with an IOM have always held this type of mortgage on their current home, with 15% having switched from a repayment mortgage to an IOM. Slightly more of those who took out their mortgage since 2005 have switched (17%) compared to those who took out their mortgage in 2004 or before (13%), and 71% of those who made the switch have done so since Such a switch is likely to be to a NEIO product, rather than an endowment policy (21% of current NEIO mortgage holders have switched from a repayment mortgage, compared to 6% of current endowment mortgage holders). The main driver for switching to IOM is for lower monthly payments (44%), with 16% saying that they had a lower income due to illness, an accident or other reasons and 13% specifically citing redundancy. Seventeen percent of those shifting to an IOM did so because of advice from a financial advisor or mortgage broker, the same number (17%) made the switch during the process of re-mortgaging. Ten percent said that they felt an IOM was better value in the long run, 7% saying it was more flexible and 7% already having other funds or sources of money as a way of paying off the mortgage. GfK Financial 26

32 5.7 Providers The providers of IOMs broadly reflect the wider mortgage providers in the UK. Table 5.6: Q10 - Who is your current mortgage with? Total Endowment mortgage NEIO mortgage % % % Santander Halifax Nationwide Barclays / Woolwich Cheltenham & Gloucester NatWest Northern Rock (Only those with 4% or more are listed) Base: All respondents Mortgage choice and arrangement among NEIO mortgage holders. The type of mortgage (endowment mortgage vs. NEIO mortgage) explains a good deal of decision making around the mortgage, as these two types of mortgages tend to be sold through different channels and at different times. It is worth, therefore, looking at NEIO mortgage holders separately, as these are the mortgages likely to be in more common distribution in the future. To recap, those choosing NEIO mortgages say they did so for three main reasons: lower monthly payments, it was the only mortgage they could afford and advice from a mortgage broker or IFA. These indicate that there may be financial stress among those choosing NEIO mortgages. As we might expect, the higher the LTV, the more likely mortgage holders are to say that they chose the mortgage because it was the only one they could afford (11% of 0-19% LTV and 28% of 81%+LTV), but differences in affordability of shortfall, that is the shortfall compared to income, and other debt holding show no consistent pattern. Effect of sales process There are some links between the sales process and the repayment strategy chosen. Those who are intending to change to a repayment mortgage in future are: more likely to have purchased through an independent financial advisor (30%); and GfK Financial 27

33 more likely to have discussed their repayment strategy with an IFA (28%) or independent mortgage broker (20%) rather than in a bank or building society branch (9%). The most common reason for choosing the mortgage was because it was the only one they could afford (28%), or for lower repayments (19%). Those who intend to downsize are: more likely to choose the mortgage because it was the only one they could afford (42%); and more likely to discuss their repayment strategy through an independent mortgage advisor (37%), or IFA (34%). GfK Financial 28

34 6 RESEARCH FINDINGS 2 ABILITY TO REPAY THE MORTGAGE Most IOM holders say they are very or fairly confident that they are on track to repay their mortgage at the end of its term. However, a fifth of IOM holders are not confident with 11% not terribly confident and 10% not at all confident. Those closest to their mortgage due year are most confident they are on track, but there are no differences by mortgage type. Most IOM holders check that their mortgage repayment plans are on track (70% doing so at least once a year), with endowment mortgage holders more likely to check annually. This is perhaps linked to the receipt of endowment policy annual statements. However 14% of IOM holders and 19% of NEIO mortgage holders say they never check. This difference between endowment mortgage holders and NEIO mortgage holders may be partly driven by the longer time horizons for NEIO mortgage holders. Just over a quarter (27%) of IOM holders had been contacted by their mortgage provider in the last year to ask about their mortgage repayments. Contact is more common where the mortgage due date is closer. This contact does seem to have some effect on IOM holders: just over a quarter go on to take some action as a result, although, only a small percentage of those contacted go on to change their strategy (8%). Over a fifth (22%) say that they are expecting to have a shortfall when they need to repay their mortgage and a further 15% say they might. Of the 37% who think they may have a shortfall, the average shortfall expected is 22,100. Nearly a quarter (23%) do not know how much this will be, 33% think it will be less than 10,000, but 15% expect it to be more than 50,000. Uncertainty about the level of shortfall increases with maturity date, as do estimates of the size of shortfall; of those expecting to repay by 2016, 46% expect a shortfall less than 10,000. This change over the time to maturity is linked to more certainty and lower holder-estimated shortfalls among those with endowment mortgages. Those IOM holders who expect to have a shortfall were asked how they would deal with this. The most common answer, given by one in five (21%) is to use savings. This is much more common among those who are due to pay off their mortgage up to 2016 (31%). In contrast, downsizing or selling the property, while chosen by a similar percentage overall (19%) is planned by GfK Financial 29

35 only 6% of those with a mortgage ending soon, rising to 39% of those with a term ending in 2026 to Fifteen percent say they will re-mortgage and this rises to a quarter (25%) of those aged 55+. In addition to asking IOM holders about their own expectations of a shortfall, the current balance and balance for when the mortgage is due to be paid off were modelled based on respondents stated repayment strategies. The modelled data shows 48% having a shortfall, with an average shortfall of 71,850. However, given that the model assumes no change in either consumer behaviour or the wider economy, longer term estimates are naturally less accurate. If we restrict the analysis to those who have a mortgage due for repayment up to and including 2022, we expect 49% to have a shortfall, but the average drops to 56,200. There is no clear relationship between household income and level of shortfall. A substantial minority (23%) of IOM holders are predicted to have shortfalls in excess of 3.5 times their annual household income. 6.1 Reported ability to repay the mortgage Whilst most IOM holders are very or fairly confident that they are on track to pay off the mortgage at the end of its term (43% are very confident, 32% fairly confident ) there is still a relatively large 21% of IOM holders who are either not terribly confident (11%) or not at all confident (10%). Those for whom the term is imminent (due to be paid off by 2016) are the most confident (51% saying very confident ), but there are no significant trends by the type of IOM. Most IOM holders regularly check that their plans for paying off the mortgage are on track (70% doing so at least once a year); with 11% doing so less often than annually and 14% never checking they are on track. Endowment policy holders are more likely than NEIO holders to check their plans on a once-a-year basis (possibly when endowment policy statements arrive) with NEIO holders interestingly being split between those who carry out frequent checks (28% do so a few times a year compared to 21% of endowment policy holders) and a significant portion (19% vs. 7% for endowment policy holders) who never check their repayment policies. However, this may be a factor of the distance in time to the repayment date IOM holders with repayment dates after 2021 are less likely than those with more imminent repayments to ever check their repayment strategy is on track. GfK Financial 30

36 Linked to the above, 27% of IOM holders had been contacted by their mortgage provider 8 (lender) in the last year to ask about their mortgage and how they intend to repay. Contact is more common when the mortgage is due to be paid off by Whilst endowment mortgage holders are slightly more likely to have this contact than NEIO mortgage holders, the difference is marginal (29% of endowment mortgage holders have been contacted, compared to 25% of NEIO mortgage holders), suggesting regardless of IOM type, providers are similarly proactive with customers. The survey did not go into details about the nature of the contact made by providers and so we cannot comment on whether these were standard communications or specific to the holder s situation. Regardless of this, these contacts do seem to have an impact, with 28% of those who were contacted then going on to take some action as a direct result (particularly endowment mortgage holders, for whom 41% of those contacted took action). The most common action taken by IOM holders as a result of being contacted by a mortgage provider was to review their repayment strategy. Although only 8% of those contacted by their providers then went on to explicitly change or supplement their repayment strategy, a more sizable 13% did at least review their strategy. In addition to their confidence in repaying the capital sum, respondents were explicitly asked if they were expecting a shortfall between their funds for repayment and the sum to be paid off 9. Twenty-two percent said that they were (rising to 35% for endowment mortgage holders) and a further 15% said they possibly would (with 8% saying don t know ). However, the expectation of shortfall is not necessarily a sign that holders have no plans to deal with this, as 44% of those who expect a shortfall remain very or fairly confident of repaying their mortgage, and may be anticipating using other avenues than their earmarked savings (such as other savings, selling the property or re-mortgaging). The nearer an IOM is to repayment, the more likely it is that holders will expect a shortfall (which could indicate that those with term ends further in the future have more robust plans, or simply that the reality is unclear, and they remain optimistic). 8 Please note that the questionnaire specifically asked about contact from the mortgage provider (lender), and not the provider of any endowment policy. 9 Q108: With any interest only or endowment mortgage there is a risk that you won t have sufficient funds to meet the full mortgage balance to be repaid. Do you expect to have a shortfall? GfK Financial 31

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